3.7.3.5 Securities Law duty violation

Section 11 of the Securities Act 1933:

These are claims for misstatements or omissions in any registration statement filed with the SEC for public offerings, in other words prospectus liability. The company usually called "issue?' has a strict liability. It has no defence. The directors, inside and outside, and advisors have a due diligence defence. The standard is negligence. Section 11(b)(3) of the Securities Act 1933 determines that outside directors are under a lesser duty to investigate than inside directors.1 The inside directors, the advisors and the company are jointly and severally liable. The Section 11 obligations are the disclosure obligations of going public. The outside directors are only proportionally liable and usually do not have to pay out of pocket.2

Section 10(b) of the Securities Trading Act 1934:

These are claims for material misstatements or omissions in any documents concerning the purchase and sale of securities. The relevant documents can be any of annual or quarterly accounts or any other statements. The misstatements or omissions must be "scienter", i.e. in making the material misstatement there must have been "knowledge" or "a high degree of recklessness" on the part of the defendants. It is logical that outside directors run a lower chance of liability. The explicit difference between inside and outside director applies as well in the obligation under the Sarbanes-Oxley Act for the CEO and the CFO to sign a "control statement". This obligation is also a Section 10(b) obligation. The Section 10(b) obligations are all the disclosure obligations of being public. Furthermore, the liability is not joint and several, but percentage-based. This is yet another reason why outside directors have minimal liability.